Annaly Capital Management, Inc. (NLY) Q4 2023 Earnings Call Transcript

Annaly Capital Management, Inc. (NYSE:NLY) Q4 2023 Earnings Conference Call February 8, 2024 9:00 AM ET

Company Participants

Sean Kensil – Director and Investor Relations

David L. Finkelstein – Chief Executive Officer and Chief Investment Officer

Serena Wolfe – Chief Financial Officer

Ken Adler – Head of Mortgage Servicing Rights

Mike Fania – Deputy Chief Investment Officer, Head of Residential Credit

V.S. Srinivasan – Head of Agency

Conference Call Participants

Bose George – KBW

Crispin Love – Piper Sandler

Doug Harter – UBS

Jason Weaver – Jones Trading

Rick Shane – JPMorgan

Trevor Cranston – JMP Securities

Eric Hagen – BTIG

Operator

Good day, and welcome to the Fourth Quarter 2023 Annaly Capital Management Earnings Conference. Please note that, today’s event is being recorded.

I would now like to turn the conference over to Mr. Sean Kensil, Director and Investor Relations. Please go ahead, sir.

Sean Kensil

Good morning, and welcome to the Fourth Quarter 2023 Earnings Call for Annaly Capital Management.

Any forward-looking statements made during today’s call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings.

Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information.

During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today’s call can be found in our Fourth Quarter 2023 Investor Presentation and Fourth Quarter 2023 Supplemental Information, both found under the Presentations section of our website. Please also note this event is being recorded.

Participants on this morning’s call include David Finkelstein, Chief Executive Officer and Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit; V.S Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights.

And with that, I’ll turn the call over to David.

David L. Finkelstein

Thank you, Sean. Good morning, everyone, and thanks for joining us today.

I’ll begin with a brief review of the fourth quarter market environment and our portfolio performance, then discuss the current macro landscape, followed by an update on our businesses and our outlook for 2024. And Serena, will then discuss our financials before opening up the call for Q&A.

Now as all are aware, fixed income markets exhibited considerable volatility in the fourth quarter, as evidenced by the 10-year treasury trading in a 120 basis point range peaking at 5% mid-October before rallying throughout November and December.

The second half of the quarter proved beneficial to mortgage assets as implied volatility declined, the yield curve modestly steepened and agency spreads tightened meaningfully. We were well-positioned to take advantage of this environment, delivering a 10.1% economic return for the quarter and we out earned our dividend with earnings available for distribution of $0.68 per share. And we achieved these results with lower economic leverage, which declined to 5.7 turns at the end of the quarter.

And as we reflect on 2023, we’re pleased to have generated a 6% economic return in a year characterized by numerous unforeseen risk events. We believe that our performance on the year demonstrates the value of our diversified housing finance model and our disciplined portfolio and risk management.

Now turning to the macro environment, the primary driver of the strong demand for fixed income since November can largely be attributed to a shift in the Federal Reserve’s communications. Moving away from the higher for longer narrative, Fed officials began to express comfort around the decline in inflation, suggesting that risks around the monetary policy outlook are more balanced.

A normalization of policy is likely to begin in 2024 as long as inflation continues to moderate. And while not declaring victory just yet, as evidenced by Chair Powell’s recent statements, policymakers are keen to ensure that a soft landing can actually occur. Powell also highlighted that future balance sheet discussions will occur in the upcoming March meeting, noting policy rates and the potential tapering the balance sheet as independent tools. And while existing financing conditions remain ample, we’re encouraged that the Fed appears to be signaling a conservative approach with regard to its balance sheet and liquidity in the financial system.

Now a second factor leading to the decline in yields in the fourth quarter is this change in debt issuance dynamics as the treasury chose to issue incremental supply in the front-end of the yield curve, taking advantage of the record amount of cash in money market funds while exerting less pressure on longer term yields.

Now the broader domestic economy remains strong with Q4 GDP at 3.3% the unemployment rate at 3.7% and consumer still exhibiting spending strength. Inflation meanwhile has moderated meaningfully in absent a shock, core PCE should benefit from base effects to bring year-over-year measures towards 2.5% in the coming months.

Now looking at the housing sector, home prices outperform the market’s expectations over the last couple of years, despite mortgage rates reaching 20-year highs. [HBA] (ph) has continued to benefit from existing homeowners experiencing lock in effect, resulting in low available for sale inventory as borrowers who struck below current market mortgage rates are unwilling to move or trade up.

Housing activity remains subdued, although we have seen modest signs of an uptick in demand following the recent decline in mortgage rates. In all told, we’re constructive on the housing sector should the labor market and the consumer remain resilient and in-line with the soft landing scenario.

Now shifting to our portfolio and beginning with the Agency sector, much of our agency reduction occurred at the very outset of the quarter, which left us well prepared for the spread widening and volatility of the market experienced as October progressed. And as volatility subsided and spreads normalized, we rotated out of lower coupons and TBAs and in the higher coupon specified pools. We remain disciplined in our selection of specified pool stories favoring high-quality prepaid protected securities, which represented the vast majority of our higher coupon purchases.

In addition, we opportunistically grew our Agency CMBS holdings by $1.2 billion as the sector did lag the move tighter in Agency MBS locking in attractive spreads and increasing the portfolio size $3.2 billion in market value. Fixed rate Agency CMBS is a complementary asset to our agency portfolio as it provides a high-yielding stable cash flow with minimal convexity exposure.

Now our agency strategy overall represented 62% of our dedicated equity at quarter-end down from 64% the quarter prior as, we further reallocated out of agency in favor resi credit and MSR late in the quarter. As it relates to our hedges, our balance liability position help protect us from the elevated rate volatility experienced during the first half of the quarter.

One adjustment we did make tactically, however, was we rotated from treasury futures into [SOPR] (ph) swaps at the very front-end of the yield curve, given the particularly tight level of swap spreads experienced in the year-end. And overall, we remain conservatively positioned as it relates to our rate exposure as seen through our 106% hedge ratio and rate shock tables.

However, given the changing policy landscape, we may reach a point where we begin to feel more comfortable adding duration of the portfolio in the near future. And as we begin 2024 with the Fed’s pivot to a more neutral monetary policy, the distribution of future rate pass has narrowed, which has resulted in a decline in implied volatility.

We’ll likely see rate cuts materialize as we approach mid-year, which historically have been a catalyst for inflows in fixed income funds. And furthermore, an earlier end to QT should help stabilize deposits, which along with incremental regulatory clarity should support bank demand. In coincident with these improving technical factors, [MBSR] (ph) and historically attractive spreads, particularly relative to fixed income alternatives, while convexity and prepayment risk in the market remains relatively low.

Now turning to the residential credit market, the non-Agency sector participated in the broader fixed income risk on sentiment to end the year with AAA Non-QM spreads 20 basis points tighter and below investment grade CRT 60 basis points tighter quarter-over-quarter. Our resi portfolio ended the year $5.7 billion in market value, up 14% year-over-year and currently comprises 20% of the firm’s capital.

The growth in the portfolio can be attributed to our organic whole loan acquisition and Onslow based securitization strategy. In the OBX retained portfolio and whole loan position now account for roughly half of the total resi portfolio assets. Residential whole loan acquisitions continue to be strong in Q4 as we settled $1.8 billion in loans, of which $1.6 billion was sourced directly through our correspondent channel.

Lock volume was robust in the fourth quarter at $2.7 billion a 13% increase quarter-over-quarter despite winter seasonals. In our quarter-end, correspondent pipeline was $1.6 billion with strong credit characteristics as demonstrated by 748 FICO and 70% [CLTV] (ph). And since the beginning of the fourth quarter, we’ve securitized seven OBX transactions for $2.8 billion inclusive of three transactions price subsequent to quarter-end. And these securitizations generated $290 million of assets at projected mid-teens returns utilizing modest recourse leverage.

Onslow Bay continues to be a leader in the residential credit market as we remain the largest non-bank securitizer and second largest overall over the past two years. In addition, we have the lowest delinquency rates across the 10 largest Non-QM issuers. And also to note, we were just able to sell the tightest new issue AAA bond executed in 2024 year-to-date. And our correspondent channel remains our preferred investment option within residential credit, allowing us to organically manufacture assets, while maintaining control over pricing, our partners, diligence, credit and volume.

Now shifting to MSR, our portfolio increased by 18% or $400 million in market value in the fourth quarter through the purchase of three bulk packages in addition to modest flow acquisitions. In our MSR portfolio inclusive of forward settling trades increased nearly 50% throughout 2023 to end December at $2.7 billion in market value, making Onslow Bay a top 10 non-bank owner of servicing rights.

The MSR market had an active Q4 with bulk transactions of modestly quarter-over-quarter, capping a record 2023 that saw over $800 billion in principal balance trade. Annaly was able to capitalize on this significant supply and we were the fifth largest buyer in the market, on-boarding $42 billion in principal balance throughout the year. In consistent with our previous commentary, we continue to favor low note rate, high credit quality collateral and given the lack of refinance incentive, the portfolio is exhibiting highly stable cash flows and historically low prepayment speeds.

The MSR portfolio had a three months CPR of 2.9% as of December, approximately 40% lower than the MBS universe. And with our unique position in the MSR market as a preferred partner to originators in light of our scale and certainty of capital, we’ve been able to establish new relationships and expand our footprint.

In particular, we’ve started to add flow sourcing partnerships, which we have begun selectively purchasing seen through this past quarter. And while low no rate collateral still our preferred segment of the MSR market, we expect these flow relationships to add a source of more predictable supply.

Now looking ahead, we anticipate the MSR market to be active this year, though sales may moderate from 2023’s elevated levels. And we continue to be well-positioned to add MSR with ample warehouse capacity, minimal leverage and a desire to continue to allocate capital to the strategy.

Now to wrap up before handing off to Serena, I wanted to note that as always we’re cognizant of the risks on the horizon and we remain prepared for additional market turbulence and vigilant as the operating environment evolves.

That said, we’re optimistic with respect to our outlook for each of our three businesses and we believe that our three complementary fully-scaled strategies should continue to provide Annaly shareholders superior risk adjusted returns, a strong earnings profile and stability across different interest rate and macro environments. And with substantial liquidity and prudent leverage, we remain ready to take advantage of opportunities where we believe capital will be most accretive.

And now with that, I’ll hand it over to Serena, to discuss the financials.

Serena Wolfe

Thank you, David. Today, I will provide brief financial highlights for the fourth quarter and select year-to-date metrics for the year ended December 31, 2023.

Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA.

As David mentioned earlier, 2023 was a year filled with substantial volatility and our team managed the markets admirably, finishing the year strong as demonstrated by our results for the quarter and full year. Our book value per share at year-end increased from the prior quarter to $19.44 and with our fourth quarter dividend of $0.65, we generated an economic return for the quarter of 10.1% and 6% for the year ended December 31, 2023.

In November and December, we experienced the inverse of the prior quarter with a sharp rally in rates and strong performance of mortgage related assets, which led to a net book value contribution of $6.74 per share from our Agency Residential Credit and MSR portfolios. These investment gains outpaced the losses on our hedging portfolio of roughly $5.56 per share.

Earnings available for distribution increased compared to the third quarter by $0.02 per share to $0.68 for the fourth quarter. EAD benefited from a higher coupon on investments and lower repo expense due to lower average balances, despite higher average repo rates, partially offset by a lower net interest income on swaps and certain positions rolled off with favorable net receive rates.

David referenced our continued rotation up in coupon in Agency MBS. We also saw an increase in weighted average coupon for our residential credit investments. Altogether, this portfolio positioning continues to provide increased yields as average yields, ex-PAA, rose again quarter-over-quarter, 18 basis points higher than the prior quarter at 4.64%.

Similarly, NIM followed the same trajectory as EAD for the quarter with a portfolio generating 158 basis points of NIM, ex-PAA, a 10 basis point increase from Q3. Net interest spread increased four basis points quarter-over-quarter at 122 basis points compared to 118 basis points in Q3 as Agency yields increased at a higher rate than repo rates net of swap interest.

The total cost of funds continue to increase quarter-over-quarter, albeit at a reduced pace in comparison to prior periods, rising 14 basis points to 3.42% percent for the quarter. Meanwhile our average repo rate for the quarter was 556 basis points compared to 544 basis points for the previous quarter.

Despite this increase our total economic interest expense was only up marginally at $665 million compared to $652 million in the prior quarter, primarily due to the decrease in average repo balances from $66 billion to $62 billion. As noted above, our swaps impact on the cost of funds further normalized due to the maturity of specific contracts, resulting in the net interest component of interest rate swaps declining by $15 million which negatively impacted our cost of funds by approximately four basis points.

Turning to details on financing, notwithstanding modest pressure we had noted in funding markets around quarter-end. Funding markets remain ample and liquid. We continue to see strong demand for funding for our Agency and non-Agency security portfolios. And while we keep an eye on RRP volumes and treasury supply, we acknowledge that the Fed is very focused on liquidity and funding markets. Our repo strategy is consistent with prior quarters and our Q4 reported weighted average repo days were 44 days down from 52 days in Q3 due to the roll down of longer term trades completed in prior quarters.

Our treasury team continued to source additional funding options for our credit businesses and had another busy quarter focusing on expanding warehouse capacity and achieving competitive financing terms for existing and new warehouse lenders. During the quarter, we upsized our committed MSR financing by $500 million and renewed a $400 million residential whole loan facility incorporating a non-mark-to-market sub-limit. As of December 31, 2023, we have $3.6 billion of warehouse and a 38% utilization rate leaving substantial capacity.

Market fundamentals for the quarter aided our liquidity profile with unencumbered assets of $5.2 billion compared to $4.7 billion in Q3, including cash and unencumbered agency assets of $3.8 billion an increase of $1 billion compared to the prior quarter. In addition we have approximately $1 billion in fair value of MSR that has been pledged to committed warehouse facilities that remain undrawn. Together we have roughly $6.2 billion in assets available for financing. Our disciplined approach to financing our credit businesses and prudent risk and cash management strategies have resulted in a very comfortable liquidity position to end the year.

And lastly, despite continued growth in our operating businesses during 2023, we efficiently managed our expenses resulting in an OpEx to equity ratio of 1.42% for the year, compared to 1.4% for the year ended December 31, 2022.

That concludes our prepared remarks and we will now open the line for questions. Thank you, operator.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Bose George with KBW. Please go ahead.

Bose George

Hi, everyone, good morning. Just wanted to start with the question just about the sort of the best place for allocating new capital. You seem to lean into credit a little more just curious if we could see that continue in 2024?

David L. Finkelstein

Sure. Good morning, Bose. Yes, we could see that continuing. I think one of the points we noted is just the acceleration in activity in the conduit channel and ultimate financing through securitization. So, we do feel good about growing the credit portfolio, primarily through the Onslow Bay channel and we’ll look for more opportunities to do so.

I think, the market share that Mike, has captured as it relates to the Non-QM market, I think it’s been impressive. We had our highest lock volume and purchase volume last quarter in a quarter where origination declines. So, we feel really good about it and we would expect to increase capital towards that effort.

Bose George

Okay. But just in terms of incremental ROEs are they still a bit better in the Agency versus that channel or how does it compare?

David L. Finkelstein

Well, Agency has a better headline ROE, but you got to consider volatility and the overall capital allocation and still makes sense on a risk adjusted basis continue to rotate further into both resi and MSR on a risk adjusted basis.

Bose George

Okay, great. And can I get an update on book value quarter-to-date?

David L. Finkelstein

Sure. We actually just closed the books for January yesterday, so I have a good month end number for you, which was up 2%. Rates have drifted a little bit higher over the last couple of days. So, we’ve softened a bit since then, but nothing to write home about.

Bose George

Okay, great. Thanks.

David L. Finkelstein

You bet, Bose.

Operator

The next question will come from Crispin Love with Piper Sandler. Please go ahead.

Crispin Love

Thanks. Good morning everyone. Appreciate you taking my questions. First can you just update us on your outlook for agency spread just given the significant tightening we’ve seen since over the last several months. So, curious on your view there on potential spread ranges with rate cuts likely coming in mid-‘24 and hopefully a less volatile rate environment here?

David L. Finkelstein

Sure, Crispin. We’ll let Srini, fill that one.

V.S. Srinivasan

Hi, Crispin. Kind of volume spread that 150 basis points over the blended treasury curve is materially tighter than the ones we saw in 2023. But the economic environment is also very different. David, had mentioned that the Fed is most likely going to ease market policy in 2024, they’re also going to taper QT. And through the first three quarters of 2023, that shed about over $200 billion in MBS and in the fourth quarter of 2023 they reinvested all of their pay downs. Our base case here is that they will continue to reinvest pay downs in 2024 and there’s potentially some upside that they might add MBS in the second half of the year.

So, overall we are pretty constructive on agency spreads. Absent the no lag scenario where the Fed is forced to hike rates again. We do not expect MBS spreads to get back to the wise that we saw in 2023. Overall I’m ready to report I think MBS spreads will play to the tighter range than they did in the last couple of years. And MBS has also underperformed other fixed income assets classes for two years in a row and we are very hopeful that in 2024 [indiscernible].

Crispin Love

Great. Thank you there for the color. And second question from me, just can you speak to how you’re thinking about the dividend level right now and sustainability in the current environment. You lowered your return assumptions across your strategies in the presentation. So, curious how that plays into how you think about the dividend level and core earnings power and returns relative to the $0.65 quarterly dividend?

David L. Finkelstein

Sure, we did moderate those return estimates given the tightening that did occur later in the quarter. But look, Crispin, we out earned the dividend modestly in the fourth quarter as it relates to the first quarter here.

We do expect EAD to be contextual with the dividend, which we feel good about. And at this time our view is that it’s not our recommendation to the Board to make an adjustment to the dividend. We’ll see how things progress throughout the rest of the year, but we feel good about this quarter.

Crispin Love

Thanks, David. Appreciate you taking my questions.

David L. Finkelstein

Thank you, Crispin.

Operator

The next question will come from Doug Harter with UBS. Please go ahead.

Doug Harter

Thanks. Can you talk about kind of what the target leverage level would can be going forward kind of given your current mix of assets?

David L. Finkelstein

Sure. Look obviously our overall leverage is going to be a function of capital allocation and the decline in leverage is attributable to some extent a lower weighting to Agency, but also the fact that look we’re when we look at the market and what we’ve recently experienced volatility is something that could persist for a little bit longer.

We’re still kind of living underneath the lion’s paw as it relates to risk events in the market. And so we’re playing it very conservatively. But the good news is, is we’re able to earn a good return with the current level of leverage.

So to sum it up, we’re comfortable with where we’re at here. Our overall leverage is going to be a function of reallocation into either resi or MSR and we feel good about where we’re at. We’re not of the mindset immediately to increase leverage nor really take it down.

Doug Harter

I guess just to follow-up on that David, kind of what are the types of events or markers you’re looking for that would kind of cause you to feel comfortable taking leverage up, and I guess how do you balance that with by the time you get those all clears, maybe spreads aren’t as attractive and then you’re leveraging less attractive assets. So, I guess how do you balance that and what are the signposts you’re looking for?

David L. Finkelstein

Sure. Give us rate cuts, give us to QT, give us stability around the world and we’ll certainly raise leverage. But look at the end of the day here, if you look at our spread shocks, if we do experience spread tightening, we’re still going to get very good returns as we saw in the latter half of last quarter, just in terms of the overall model, we are generating a more stable return with less leverage than what a mono-line agency firm would deliver and we feel very good about it.

Now to the extent there are some real green shoots out there as it relates to volatility in the market. Yes, we can increase leverage if spreads are attractive. And to the extent that we get a widening in spreads, we have ample liquidity and in the balance sheet to allow leverage to organically increase without having to worry about selling to manage our leverage.

So it’s a really good position to be in right here, Doug. But to the extent things do change for the better and the market is priced to that soft landing scenario, it’s priced perfection across all assets with possible exception of some mortgage related assets. So, we’re a little bit cautious here, but that could change.

Doug Harter

Thank you.

David L. Finkelstein

You bet, Doug.

Operator

Your next question will come from Jason Weaver with Jones Trading. Please go ahead.

Jason Weaver

Hi, good morning. Thanks for taking my question. I’m just going to dovetail off Bose’s question with a bit of refinement. I was wondering, can you ballpark the incremental ROE range for new deployment across both Agency and residential credit today?

David L. Finkelstein

Yes, I think we’ll go around the room here but in Agency look we could get mid-teens returns, upper teens returns on specified pools for example, moderate loan balance production coupon pools to the extent we can find them. There are some scarcity, but you can get upper teens in those assets. And then Mike, you want to give a little rundown on the resi front?

Mike Fania

Sure. Hi, Jason, this is Mike. In terms of securitization, the organic whole loan strategy, we’ll say that’s call it mid-teens using a modest amount of recourse leverage within the securities part of our portfolio call CRT that’s probably high-single-digits on call it two turns of leverage for below IG M2s. And then in terms of NPL, RPL, we’ll say it’s low teens on call it three turns of leverage.

So, the majority our capital deployment within resi has been in the whole loan and OBX strategy given those returns.

Ken Adler

Hi, Doug, actually it’s Ken, we can give you a little color on MSR as well. Yes, I mean the MSR margin is providing with and we put it in the book around 10% to 12% return. Now those returns are a little bit lower because we do not material amounts of leverage on that strategy at this moment. Now we have the liquidity line, the ability to leverage that asset and drive those returns higher but managing with the context of the entire portfolio that return is additive to the overall target.

Mike Fania

And Jason just to add to that on MSR, we’re running that portfolio at four-tenths of a turn of leverage and given the low note rate nature of it and how benign the cash flows are, it could be levered to a greater extent. But if you think about it, the agency portfolio is doing some of that levering for it. And so if you consider the benefit of that then that gets those returns up into the teams.

Jason Weaver

All right. Thank you for that. That’s actually very helpful. I know David, you said in your prepared remarks about the shifting from treasury based hedges over to SOPR swap. Yes, obviously, we’ve seen what’s happened in swap spreads for the last, call it, 2.5 months or so since the end of November. Can you just elaborate on that shift in strategy a little bit and that’s what’s behind it?

David L. Finkelstein

Yes, sure. So, both November and December month ends, we did have a little bit of pressure in financing markets, which suggests that balance sheet assets might be a little bit heavy and that’s what led to a lot of the swap spread tightening that we experienced and for example, in the very front end of the yield curve at the two year level, two year rate, we got to negative 21 basis points on swap spreads versus treasury, so versus SOPR. So, the way we viewed it is that that will gravitate to zero through the passage of time over the two years and it made perfect sense to us to transition some of our two year futures over to paying on swap and just since the end of the year those swap spreads have gone from negative 20 or thereabouts to negative 14 this morning.

So, it’s been a good trade. We do still think that swap spreads are on the tight side particularly even out the curve with 10-year swaps at negative 36 basis points that to us looks a little bit tight. The Fed has obviously begun discussing the tapering of QT and as the Chair noted last week that will be an active conversation at the March meeting.

To the extent they do move on that this spring, then we will get a little bit of relief as it relates to balance sheet and that should help swap spreads widen back out.

Jason Weaver

That’s helpful. And maybe some of that’s due to the last two months, $200 billion of issuance, but that’s new here or there.

David L. Finkelstein

Yes.

Jason Weaver

All right. Thank you for that. Yes, yes. I appreciate the time.

David L. Finkelstein

You bet.

Operator

The next question will come from Rick Shane with JPMorgan. Please go ahead.

Rick Shane

Hi, good morning, everybody. Two questions, one, on each side of the balance sheet. When we look at the growth in the fourth quarter in terms of the agency book, you guys were most of what was added appears to be up in coupon 6s and 6.5s. I’m curious at this point in the cycle, how you feel about adding premium securities, given that, as we sort of reached that inflection point, we could see pretty significant bifurcation in the book and speeds could pick up in those coupons fairly quickly.

David L. Finkelstein

Yes, let me pass it to Srini to talk about what we’re exactly doing in higher coupons.

V.S. Srinivasan

Sure. I think we’ve highlighted this over the last few quarter, our core strategy is to move up in coupon and specify both production. What we have done over the last two quarters is to execute the strategy that basically, the coupon stack given the sharp move in the coupon stack traded with a lot of volatility in the first quarter, so this gave us an opportunity to move up in coupon at relatively attractive levels.

And the pace at which we move up in coupon is somewhat dictated by our ability to source high quality specified rules at reasonable valuations. So, that’s why the pace has been somewhat moderated as which we move up in coupon, but we continue to like specified growth up in coupon.

I think if you look at TBA, it’s pricing in the loan size that new production is, the new production loan size has gone up almost $75,000 over the last year or so and is now running at around $450,000 so these pools are likely to have very steep S curve and very poor convexity profile. And so the payoffs will compensate for one of our weakening we see in the TBA collateral.

David L. Finkelstein

And one more point to note, I was just going to say that if you look at the overall portfolio, the average dollar price is still $98 notwithstanding the rally we experienced in the fourth quarter and you do get the most spread in the higher coupon. So you take more convexity risk, but we try and mitigate that as Srini said through specified pool selection, but at the end of the day, we get paid to manage convexity risk. And if you’re way down the coupon stack in low dollar price securities, you’re not going to get the spread you need. So that informs the strategy.

Rick Shane

Got it. And it is as you make the point I realized that one of the things that shifted not only is where you are in coupon, but the percentage of generics, to your point also went down. So that’s consistent. Turning to the right side for a second, if we look at the repo funding from the third to the fourth quarter, the duration went down or the funding time went down slightly.

I’m assuming in the third quarter you extended funding with the idea that you didn’t want to take risk into year-end balance sheet contraction and that some of that was just run off of the 120s — over 120s in the longer duration borrowings rolling down, but I’m also wondering if what we’re seeing here is a little bit more bullish positioning on rates with you shortening the funding also.

David L. Finkelstein

Yes. So to your first point about adding term in the third quarter, you are correct in that and that does reflect the roll down. And I’ll tell you another point to note about the repo market today, Rick relative to a number of years ago is that the vast majority of the liquidity is in the very front end of the curve there and to really extract the value in the repo market, it’s we do need to stay somewhat short.

We did have some very good opportunities to put on some long-term trades last year that we benefit from. But generally speaking the term of the repo is going to remain relatively short because that’s where the liquidity is. And to the extent that the Fed does ease certainly then you benefit from that by being able to capture those lower rates. So to a certain extent that’s the case as well to your second point.

Rick Shane

Perfect. Okay. Thank you. And term was the phrase I was struggling to find at 6:30 in the morning, I apologize. Thank you.

David L. Finkelstein

We understand our west there.

Rick Shane

Thanks, guys. Have a great day.

David L. Finkelstein

Thanks, Rick.

Operator

Our next question will come from Trevor Cranston with JMP Securities. Please go ahead.

Trevor Cranston

Hey, thanks. Good morning. David, I think you mentioned in your prepared remarks that you might consider adding duration to the portfolio in the near future. So I was wondering if you could maybe just talk a little bit about what kind of catalyst you’d be looking for that and maybe just generally your outlook on rates particularly at the long run of the curve.

David L. Finkelstein

Yes, sure. So we have duration has been added organically a little bit since the end of the quarter just through higher rates, but what we’re looking for is more persistent signs that inflation has moderated to a point where the Fed feels good about cutting rates and we think we’ll get there. If you think inflation prints for the next three months are going to be consistent with what they were for the last three months, we do think the Fed will release beginning in May irrespective of how the economy plays out.

And once we see those signs, we’ll be more comfortable with duration because real rates still do look attractive. And ultimately, we think where the long end of the yield curve should settle as we get through this is probably inside of 4% and look for those signs that volatility dissipates and that might be beneficial to the portfolio.

Trevor Cranston

Got it. Okay. That’s helpful. In the last several days, there’s been a lot of headlines coming out about NYCB in particular, can you guys talk about kind of how you think about CRE market and if you see any sort of incremental risks coming out this year from banks or others potentially sitting on unrecognized CRE losses and sort of how you think that would impact markets overall? Thanks.

David L. Finkelstein

Yes, certainly. One point to notice is we’re certainly thankful a little over two years ago we did sell our commercial platform. So we’re glad not to be in that sector. We also last year for example we took or we sold all of our CMBX positions to reduce that securitized exposure and currently what we own is roughly $220 million of AAA CLOs, which are almost exclusively multifamily, so very little exposure there.

Now as it relates to the broader CRE market, yes, there’s certainly some isolated risks out there. We do think that this particular episode will be contained. There are other banks out there that we’ll have to work off some of those CRE loans. The big banks are in good shape, but it’s something that’s going to impact a lot of the regional banks over the near-term, but we don’t see it as being systemic to any extent notwithstanding some of the volatility we’re experiencing in markets as a consequence of New York Community Bank.

So long story short, we don’t have exposure and we’re thankful of that, and we think this will be a relatively muted event in the market, but it is some factors that need to be worked through at the bank level.

Trevor Cranston

Okay. That’s helpful. Thank you.

David L. Finkelstein

Thanks, Trevor.

Operator

The next question will come from Eric Hagen with BTIG. Please go ahead.

Eric Hagen

Hey, thanks. Good morning. Just continuing on that topic of the regional banks, I mean, how do you feel like mortgage spreads and liquidity have responded to pressure there over the last week and do you see that creating an opportunity to buy MSRs potentially?

And then even tacking on to that, I mean, what’s your outlook more generally for the supply of MSRs this year and how aggressive you expect to be in maybe bidding for bulk MSRs at different levels of interest rates?

David L. Finkelstein

Sure. So I’ll start off with just the overall mortgage market and then Ken can talk about MSR specifically. There has been a little bit of volatility in spreads the past week and it certainly does create opportunities, but it’s not the type of event where we’re looking to dive into the market, we’ve reinvested runoff at better levels and things like that. And we’re watching, but it’s not a catalyst to necessarily jump into the market on MSR.

Ken Adler

Yes. I mean over the last year, I mean regional banks have been buyers of MSR and there’s been some regional banks that have been sellers of MSR and the actual names are available in the transfer data. On the margin, I mean we definitely think this will take some of those buyers out. The allocation of MSR to the regional banking sector, I mean it might — it doesn’t seem like the whole news of large portfolio events are distressed institutions. So on margin we believe it will be a positive event for our strategy specifically because we are an opportunistic participant at times, so that more to come.

David L. Finkelstein

Yes, we will also see how banking regulation plays out and what impact that may have. But generally speaking, we’re reasonably optimistic on our ability to source MSR in a less competitive fashion.

Eric Hagen

Alright. I appreciate it guys. Thank you.

David L. Finkelstein

Thanks, Eric.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. David Finkelstein for any closing remarks. Please go ahead, sir.

David L. Finkelstein

Thanks, Chuck, and thank you everybody. Good luck and we will talk to you in Spring.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.